As a small business grows, it’s almost inevitable that it'll take some kind of capital injection. Even when you’re doing everything right, there are times when your profit just isn’t enough to reinvest into the business to take benefit of new opportunities. Perhaps the company must hire more and more people, expand to a new location, or fulfill a sizable purchase order. As exciting because this growth could be, securing a good investment may also be overwhelming. We meet and talk with small business owners every day who need capital to grow, but aren’t sure what lenders need or search for. Here are four tips from the small company lender that will help you with securing a small business loan.
1. Know Your Needs
Before starting a conversation having a potential lender, it is important that a small business owner knows how much money the business needs, and just what it will be used for. For instance, if your company is asking for a $100,000 loan, anticipate to provide a breakdown estimate of the items the cash is going to be used for. Breakdowns for the utilization of funds may include equipment purchases, capital, tenant improvements, inventory, etc.
At PCV, we provide loans between $10,000 and $200,000. Sometimes, borrowers will ask for $200,000 because that’s the biggest amount we provide. However, when talking through their needs together more, they realize they don’t require the full $200,000, but rather $175,000 or even $100,000. You never wish to add more debt for your balance sheet than necessary. And from the lender side, we need to make certain owners truly understand their demands.
2. Have Accurate Financials
Small business owners are often so busy with sales, marketing, and growing their firms that monitoring their financials becomes a last priority. However, having accurate numbers for lenders to examine is essential towards the application. The simplest way to obtain your fiscal reports ready for evaluation is to establish good bookkeeping practices early on. There are several easy methods to do this. One way is by using a cpa system like QuickBooks. But don’t worry if you’re still using Excel, or perhaps keeping a ledger in writing. An alternative choice is to hire a part-time bookkeeper to handle the process. With either method, you should be ready to pull a year-to-date profit and loss statement and recent balance sheet.
After the fiscal reports are collected, there are a few financial ratios to keep in mind. The first is your debt service coverage ratio (DSCR). The DSCR measures the cash flow open to pay your outstanding debt. Most lenders may wish to see at least a 1:1 ratio to show the company will be able to repay the loan. Other financial analysis numbers to be aware of include debt to value, value, and also the current ratio. A lender will probably take a look at those when creating a decision.
3. Prepare yourself with Research Items
Depending on what type of loan your enterprise is applying for, a lender will request additional research items. These could include business taxes, personal taxes, personal fiscal reports, debt schedules, and financial projections. The best way forward here's to have the company's legal and financial documents complete and held in a place that’s easy for disbursal.
4. Inform your Story!
Lenders, specially those that are mission-based like Pacific Community Ventures, actually want to know you and your business. You want to know very well what inspired your company idea to begin with, and just how you intend to carry on growing your passion in addition to your organization. Why did you start your business? Who are your clients? Who are your employees? What is your growth strategy? What exactly are your major accomplishments? Would you give back to the community? Stories and relationships matter.
For example, we'd an applicant this past year who was a recent immigrant. Therefore, his credit score hadn't yet been established. For many financial institutions, this may be a reason to not result in the loan. However, we learned that he sources directly from farmers in third-world countries, pays above fair-trade prices, and hires from disadvantaged communities. I was so inspired that people couldn't help but result in the loan!
We hope this can help. We’d like to hear about your own questions in accessing or applying for a small company loan.
